November 15 (Bloomberg) — For Senator John Cornyn, it was the situation in Greece.

The Texas Republican said he is willing to back tax increases as part of a major deficit-reduction deal because he fears the European debt crisis could spread to the U.S.

“We’ve never been in this spot before,” said Cornyn, who also leads his party’s effort to elect more Republicans to the Senate. “We’re looking over at Europe and what’s happening in Greece and Italy — we risk having another huge financial crisis in this country, and we’ve got to try to solve the problem.”

He is one of a growing number of Republicans, many with otherwise impeccable anti-tax credentials, who say they are willing to raise taxes to reach a big deficit-reduction deal with Democrats.

That may help insulate them from charges of stubbornness if Congress’s bipartisan supercommittee doesn’t meet its Nov. 23 deadline to find a way to cut $1.5 trillion. For now, it’s helped shift Washington’s debate to how much, rather than whether, to raise taxes.

Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said he is encouraged by the shift even as Democrats scoff at a specific Republican proposal.

“It’s a step in the right direction for them to just rhetorically cross that line,” said Conrad.

‘Real Trouble’

Asked if Republicans were trying to set up a blame game should the supercommittee fail, Conrad said, “I hope not” because “if we aren’t beyond that, we are in real trouble.”

Democrats say the Republican deficit plan relies too heavily on spending cuts and would give the wealthy too much of a tax break. Some question whether its numbers add up.

At issue is a proposal by the supercommittee’s Republicans to trade permanent cuts in income tax rates, with the top rate dropping to as little as 28 percent, for new limits on deductions, exclusions and other tax breaks. They estimate that it would produce $300 billion to reduce the deficit.

The plan’s principal author is Senator Pat Toomey, a Pennsylvania Republican who previously led the Club for Growth, a Washington anti-tax group. House Speaker John Boehner, an Ohio Republican, today endorsed the proposal, calling it a “fair offer.”

Some conservative organizations are accusing Republicans of trying to hide tax increases through the Toomey plan.

Norquist Reaction

“Closing tax loopholes is all well and good,” said Americans for Tax Reform president Grover Norquist in an opinion article in Politico. “But doing so to raise revenues is just as much a tax hike as raising tax rates.” He added, “Any congressman who wants to keep his promise to voters to oppose tax increases” must oppose the plan.

Many Republican lawmakers are also unhappy with the proposal. “We don’t have a tax problem — we have a spending problem,” said Senator Jim DeMint, a South Carolina Republican. “For us to get lulled into ‘how much to raise taxes’ in this thing is foolish.”

Senator Orrin Hatch, the top Republican on the tax-writing Finance Committee, said, “Some of these loopholes really aren’t loopholes.” He called them “important policy provisions, like the home interest mortgage deduction.”

Republican supporters of the plan say they are trying to lock in lower income-tax rates that will otherwise jump if, as is currently scheduled, the tax cuts enacted in President George W. Bush’s administration expire at the end of next year. President Barack Obama opposes extending the Bush-era cuts for those earning more than $250,000, and Republicans are unlikely in the 2012 elections to win the Senate votes they would need to keep the tax cuts in effect.

‘Biggest Tax Increase’

“What we’re trying to do is avoid the biggest tax increase in the history of the country,” Senator Charles Grassley, an Iowa Republican, said of Toomey’s plan.

Toomey declined to comment other than to point to a Nov. 10 Wall Street Journal editorial quoting him as calling his proposal a “bitter pill” that is “justified to prevent the tax increase that’s coming.”

A number of Republicans are playing down anti-tax pledges they signed with Norquist’s group. “We take an oath to uphold the Constitution” and “that trumps any and every consideration,” said Cornyn.

“I didn’t know I was signing a marriage vow,” said Representative Mike Simpson of Idaho, one of 40 House Republicans who recently signed a letter signaling willingness to raise taxes as part of a major deficit-cutting deal.

Shifting Opinion

Senator Lamar Alexander of Tennessee, the chamber’s third- ranking Republican, said he saw a sign of shifting opinion when three of the supercommittee Republican members — Toomey, Rob Portman of Ohio and Arizona’s Jon Kyl — briefed Senate colleagues on their plan and no one complained.

“For Pat Toomey and Portman and Kyl to come in and tell a whole roomful of Republicans that ‘we’ve put $250 billion of tax increases on the table’ and not get a murmur of dissent is remarkable,” said Alexander.

Senator Saxby Chambliss, a Georgia Republican, said his party’s lawmakers should consider bigger tax increases if it would lead to a larger debt-reduction deal, because the political price they would pay will essentially be the same.

“You’re going to be criticized by the same people irrespective of what the number is,” said Chambliss.

WTI Cushing Crude breaks 100 (Bloomberg), with Brent over 110. An added drag on effective demand in the US, UK, and EZ at the same time that fiscal austerity is biting. Of course the inflationistas are screaming that the sky is falling.

Well, I would argue that an alarmingly high percentage of Americans don’t even know what the Fed is. And I don’t mean just innacurate misconceptions, I mean if you asked them “what is the Federal Reserve Bank of the United States,” they would just turn their head slightly and furrow their brow.

But I agree, even those who do have a grasp on how our banking system works think that both the Fed is an independent bank and that they must operate like a bank/corporation.

How can the majority of the people believe that the governments have to borrow and tax in order to spend and that fiat money is a pre-existing commodity which needs to be acquired by the government from the “markets”?

I was looking for a historic example of a similar mass delusion affecting not a small group within a society like ordinary cults do but the whole society.

I came to the conclusion that we live in a kind of parallel reality like the Aztecs of Mesoamerica – who believed that if they had stopped killing people as human offerings to gods, the world would have stopped.
“Human sacrifice among the Aztecs and in Mesoamerica in general must be seen in this context – sacrifice and death is necessary for the continued existence of the world.” http://en.wikipedia.org/wiki/Aztec_religion

Because of these idiotic and inhumane beliefs Cortes was able to destroy the whole empire, exploiting the religious myths and rallying other tribes against the Aztecs.

The majority of the modern people believe that human lives (not “mine” of course!) also should be sacrificed to gods of Austerity or rather to a carnivorous Golden Calf – otherwise the sun may not rise in the morning again and money will be worthless.

It is hard to believe but the “99%” simply prefer to live in this virtual reality even if they are the the greatest losers.

@Adam (ak), This is something that has also interested me in all this…

Adam, how many people in the world (out of now over 7B) really know how these systems operate? I am saying less than 1,000.

Resp,

Adam (ak) Reply:November 16th, 2011 at 4:39 pm

Matt,

I am afraid many more – but they live in China and are reluctant to publish in English – finding them requires a bit of digging.

A Google search for ‘”functional finance” lerner site:.cn’ (functional finance has to be in quotes) returns several documents.

The official policy is close to Keynesian “deficit dove” position combined with some elements borrowed from Marxist analysis but we have to keep in mind that in China these Western theories are only treated as wide guidelines. They will keep turning the knobs until they system is working.

If this means allowing commercial banks to lend to the local authorities which will then never repay the debt – so what? But then when overheating and housing bubble is a problem the knob is turned again and the tap is off. There will be negative equity? Fine, we can fix it…

I found an interesting essay on unemployment showing the process of reasoning and reaching a conclusion employed by some Chinese scholars :

“As economic conditions become more and more intricate, both Marx’s and Keynes thoughts can be partial and limited. The capitalist complex definitely cannot be generalized in Marx’s pure perfect competition model. Nor can it be completely mirrored in Keynes’s analyses or other schools. Unemployment is still an intractable pitfall nowadays which worries governments and economists a lot. Then, it is more pertinent to say that both Marx and Keynes provided some political approaches rather than the practical ones to tackle that problem. Which economic theory is preferred in practice is largely dependent on the governors’ ideologies and politics. With numerous economic proposals to choose from, it is better to combine empirical statistics and contextual circumstances together to construct an elastic plan. Hopefully, modern economists can contribute more conceptions to advance economic theories and assist decision makers more efficiently in arranging economic affairs.”

I can disprove this monetarist drivel by looking at the data. Look at lines 22 and 28, they show how during the QE2 which started 4Q 2010 Foriegn Official Assets didnt increase at previous rates, and Foriegn Private Assets showed the increases. So the Chinese Private export entities had to keep their USD balances in the banks as deposits instead of having the BoC change them out of their USD for RMB, which under this monetarist morons paradigm would have lead to Chinese “inflation”.

Where is this Analysis Center? Do you have contact information? I live right between Wash and Balt and perhaps can make some calls and go over there to straighten this out…. matt_franko@mac.com, Resp,

which is also one reason why I suspect the currency is increasingly at risk of fundamentally falling. I’ve been watching for the turn for a couple of years now and am more likely to jump on it after it starts weakening than to try to anticipate it

Here’s a fun fact, of the $3.2T in foreign-held Treasuries, $2.8T is T-bonds and T-notes doesn’t break it down further but the lionshare of that (over $2T) are T-Notes. Funny thing about T-Notes, they’re the only kind of Treasury obligation that the Secretary can unilaterally decide one fine day to call in, all $6.5T of them, on 4 months notice.
:o)(b) The Government may redeem any part of a series of notes before maturity by giving at least 4 months’ notice but not more than one year’s notice. 31 USC 3103

Step 2. Chinese Private Co. goes back to the PBoC and the PBoC will exchange the Private Co’s $1M for say 6M Yuan. So that transaction results in a 6M Yuan increase in Chinese Private co’s bank account in China, and a markdown of $1M in their US bank account while the PBoC US bank account gets marked up by $1M, This Transaction results in a $1M decrease of Line 28 in the above Fed report and a corresponding $1M increase in Line 22 of the above Fed report. The USD balances are now in the Foreign Official Assets at the Fed under the China account.

If this is correct, then the USD/Yuan exchange rate is set by the rate at which the PBoC agrees to change out their private Cos. who obtain USD balances in the US banking system through the course of their export business. So if the Yuan is to “weaken” vs USD, this seems like it would depend entirely on the PBoC, for instance if China wants to increase exports to the US, China could “weaken” the Yuan by agreeing to exchange Yuan balances for USD balances at a higher ratio; ie, if they agreed to provide 9 Yuan for every USD their private Cos. obtain in the US vs the 6 Yuan they provide today, that would let their exporters lower the prices they propose to US importer Cos.

I dont see what “operationally” the US can do about this one way or the other as this Rickards fellow suggests. It seems the PBoC sets the exchange rate directly. I guess we could complain.

This would also increase the profits of their Domestic Cos. (in Yuan) and this I suppose could cause increase of Yuan NFAs in China and perhaps demand in China which could cause prices to increase in China, else equal…. which some still call “inflation”.. Resp,

@Matt Franko,I dont see what “operationally” the US can do about this one way or the other as this Rickards fellow suggests. It seems the PBoC sets the exchange rate directly. I guess we could complain.
Ha ha, like they say in the British Foreign Office:
Never complain, never explain.

We can do one of two things,
1. Set up an import certificate market. At the first stage (“Chinese Private Co. sells product to a US entity for $1M.”), they would also have to buy at market ICs from US exporters (who’d be issued one dollar in ICs for every dollar in exports). This would automatically balance US current accounts by means of a synthetic currency exchange.http://en.wikipedia.org/wiki/Import_Certificates

2. Offset trade deficit demand leakage with coin seigniorage. Whatever the trade deficit is, 3.6% ($540T) currently, Tsy would simply deposit with Fed an equivalent amount in platinum coinage and book it as miscellaneous receipts. Reducing the budget deficit from $1.3T to $760B… not too shabby. The bigger the trade deficit, the more seigniorage revenue is put on-budget.http://traderscrucible.com/2011/11/03/4-ways-to-change-the-fed/

As long as our economy is operating at full employment (which will require offsetting the budgetary cost of a couple other things, see above link), we can simply mint trillion dollar coins as necessary to pay for all the goods and services China wants to send us. The day China gets tired of that game is the day we can get around to setting up that import certificate market.

The main issue with the platinum coin option is that the Chinese can threaten the US by offloading the USD on the commodity markets what would lead to cost-push inflation. This may look irrational but their main goals are political not economic. One of them is to replace USD as the global reserve currency. But personally I would mint the coin and send it to China anyway. They can have it! Buying the Treasury bonds should be considered a privilege.

Throttling import from China is a silly idea because it will eat away profits of American companies. It will be blocked by the various lobbies in the Congress.

The President of the United States has just decided to challenge China directly by relocating the military resources to Australia. We can expect a few interesting things to happen near the Paracel Islands soon. Will this work? I don’t know. We are now truly in the same old rusty boat and we may sink together if Mr President does not embrace Functional Finance and doesn’t find the money to fix the leak… minting the coin is one of the options.

of course, we’ve been actively trying to get them to strengthen their currency/weaken the dollar, and they are the ones who’ve been resisting, presumably to support their exporters.

beowulf Reply:November 16th, 2011 at 11:16 pm

@Adam (AK),
Err, that would end badly for the Chinese. That would hand the President a constitutional cheat code, namely, turning it into a national security issue (the key words, “national emergency”). Almost instantly (the paperwork can catch up with the orders in due course), the President can mandate, block or or unwind any US market transaction (and lean on our friends and allies to do likewise) and order any federal agency (including the independent variety like the Fed) to assist him– I believe the Fed can create or destroy dollars at will and I believe the Chinese cannot. Which reminds me, don’t we all remember where we were the day President Obama declared a national emergency and finally, FINALLY took on the Japanese Yakuza (July 24, 2011 in case you were in a coma or on a submarine). :o)

By the authority vested in me as President by the Constitution and the laws of the United States of America, including the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) (IEEPA), the National Emergencies Act (50 U.S.C. 1601 et seq.) (NEA), and section 301 of title 3, United States Code… I therefore determine that significant transnational criminal organizations constitute an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States, and hereby declare a national emergency to deal with that threat…”http://www.japansubculture.com/2011/07/president-obama-declares-war-on-the-yakuza-go-get-them-barry/

beowulf Reply:November 16th, 2011 at 11:39 pm

@beowulf,
On second thought, I fear I have dramatically understated the President’s discretion in these matters. By US market transactions, I don’t mean just securities markets, even elementary school bake sales would count. I’ll quote the IEEPA that the sworn enemy of the Yakuza cited in his executive order:“the President may… investigate, block during the pendency of an investigation, regulate, direct and compel, nullify, void, prevent or prohibit, any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States” 50 USC 1702

That’s kinda broad. Since Standard & Poor’s parent company McGraw Hill most certainly has at least one foreign shareholder, Obama had full legal authority under this statute to issue his own rating downgrade (so to speak).

BTW, I believe that the Chinese own 7% of US Treasuries. As I recall, average daily trading volume in UST is in excess of 500B, so the market would absorb them quickly. But then, how are they going to keep the Yuan low against the dollar if they spend USD instead of buying them hand over fist like they have been doing?

Matt Franko Reply:November 17th, 2011 at 9:01 am

@beowulf, Unforgiven, “how are they going to keep the Yuan low against the dollar” good point, if they were to reverse course and start to buy resources with their USD balances, then the US CAD w China would probably go to zero or positive.

At that point there would be no net USDs for the PBoC to buy and they would be a currency monopolist in a market place that net was not transacting? They would become a price taker at that point?

All in all it all this seems very far fetched at this point, China policy seems to be the exact opposite (seems they desire a lower currency). Perhaps this fellow Rickards is auditioning to be a consultant on the next “James Bond” movie….

Damn what a mess. With double digit unemployment, these guys are going to remove net financial assets from the economy – though both higher taxes and less spending, and call it progress. We’re in a bipartisan boobocracy.

@Tyler, Only because the Democrats are offering big spending cuts along with them. If we increase taxes on the rich, but decrease taxes on everyone else, and boost spending on jobs, we could actually increase net financial assets in the economy.

I guess a lot depends on how long-term the austerity measures are. If the spending cuts and tax increases are agreed upon now, but put off until after we have recovered, it wouldn’t be so bad.

Possible, but they’re not getting rid of automatic stabilizers yet. Most likely outcome, I think, is that like Japan, all of these efforts to lower debt-to-GDP would come to naught. Like Warren says, it’s like trying to lift the bucket you’re standing in.